With the rise in American investors holding crypto assets in recent years, it can be challenging for investment professionals to value them accurately.
To help advisors navigate the evolving landscape, the CFA Institute has created a guide to the most relevant valuation models and tools to support analysis of crypto assets, in connection with smart contract platforms, decentralized applications, and bitcoin.
Over the past decade, the market cap of crypto assets has soared to an estimated $1 trillion, according to CoinGecko, while the price volatility and industry upheaval that has become synonymous with crypto adds to the valuation conundrum.
As part of a move towards the development of a framework for crypto assets valuation, the models in the CFA Institute guide include fundamental valuation approaches such as discounted cash flow analysis and relative valuation approaches adapted from traditional finance, where appropriate, as well as newer models specific to crypto assets.
"This guide provides a framework for investment professionals to undertake a thorough analysis of the valuation drivers of crypto assets, including fundamental characteristics such as cash flows, growth rates, and tokenomics,” Rhodri Preece, senior head of research at the CFA Institute, said in a statement. “Current valuation models have their limitations, and the lack of historical data make statistically robust crypto asset valuations challenging. No single valuation model or metric should be used in isolation."
There is complexity around establishing valuation models for crypto assets, with for example, four valuation models for bitcoin alone: total addressable market, stock-to-flow, Metcalfe's law, and the cost of production model.
Preece notes that history shows that the establishment of valuation standards can take a long time.
"After Graham and Dodd published the classic 'Security Analysis' in 1934, it took decades for an established investment valuation framework to emerge for equities,” he said. “Most crypto assets are less than a decade old; as such, we should not be surprised that views over their valuation and legitimacy in investment portfolios vary widely.”
The CFA Institute’s Valuation of Cryptoassets: A Guide for Investment Professionals is available here.
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